On August 26, 2015, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Philippines.¹

The Philippine economy continues to expand strongly in line with potential growth. Real GDP grew by 6.1 percent in 2014, driven by household consumption, private construction, and exports of goods and services. Economic growth slowed in the first quarter of 2015, due mainly to temporary factors, including the effects of dry weather on agricultural production, weak global demand for exports, and slow budget execution. Inflation fell below the bottom of the BSP’s target band (3±1 percent) in June 2015, led by lower fuel and food prices. As the economy is growing broadly at potential, there is no evidence of price or wage pressures, and considerable slack in the labor market remains. The current dry weather associated with El Niño conditions has not yet resulted in higher inflation. The external and fiscal positions are strong, with a 2014 current account surplus of 4.4 percent of GDP, gross international reserves of $79.5 billion (or 406.5 percent of short-term debt by residual maturity), a national government fiscal deficit of 0.6 percent of GDP, and general government debt at 36.4 percent of GDP.

The outlook for the Philippine economy remains favorable despite uneven and generally weaker global growth prospects. Real GDP is projected to grow by 6.2 percent in 2015, as lower commodity prices lift household consumption and improved budget execution raises public spending. Lower fuel prices, partly offset by somewhat higher food prices due to assumed moderate El Niño conditions, should help keep inflation in the bottom half of the BSP’s target band. The current account surplus is expected to rise in 2015 due to lower oil prices and continued inflows from business process outsourcing and remittances. Fiscal policy is expected to remain prudent. Risks to the outlook are tilted to the downside. The Philippine authorities are well equipped to respond as needed with suitable policies should any risks materialize, particularly given the strong fundamentals and ample policy space.

Executive Board Assessment²

Executive Directors commended the Philippine authorities for their prudent macroeconomic management, which has delivered strong outcomes and has set the stage for favorable growth prospects despite external headwinds. Looking ahead, Directors encouraged continued vigilance in managing risks, and supported the authorities’ focus on infrastructure investment, structural reforms, and on improving living conditions and achieving more inclusive growth.

Directors welcomed the government’s plan to step up infrastructure investment and social spending, and return to the medium term fiscal deficit target of 2 percent of GDP. They noted that the planned increase in public expenditure in 2015 is appropriate from both cyclical and development perspectives, given the current low inflation, large infrastructure and social needs, and low and declining public debt. Directors also encouraged further efforts to strengthen public financial management and budget execution, and to mobilize revenue to meet the large social and infrastructure needs.

Directors considered the current monetary policy stance as appropriate in view of the low inflation, moderating and more balanced credit growth, and moderating—albeit still robust—economic activity. They encouraged continued vigilance, in particular if inflation or credit growth were to accelerate with signs of potential overheating. Directors supported the central bank’s plan to implement an interest rate corridor to improve monetary policy transmission, and encouraged the passage of the central bank charter that would authorize the issuance of central bank bills and increase minimum capital. Directors also emphasized continued exchange rate flexibility, with participation limited to smoothing excessive volatility.

Directors noted that the financial system remains sound. They welcomed the use of targeted prudential policies to limit financial excesses and strengthen resilience, and noted that more stringent prudential regulations may be needed should any systemic risks become apparent. Directors encouraged the passage of the draft law that broadens the central bank’s financial stability mandate, and welcomed the central bank’s efforts to enhance access to information on conglomerates’ finances.

Directors supported the authorities’ medium term priorities that would allow the country to reap the dividends from its young and growing population. These priorities should include raising infrastructure spending, facilitating public private partnerships, improving the business climate, and enhancing human capital and social services for the poor. Directors also welcomed the focus on financial deepening and inclusion as essential elements of the authorities’ inclusive growth strategy. They noted that alternative means of financing and hedging, such as bond and equity markets, could help finance large infrastructure needs. Directors welcomed the recent release of the national strategy for financial inclusion.